The Subprime Mortgage Collapse and You

There have been a lot of changes in the mortgage industry due to the recent sub prime mortgage collapse and subsequent credit crisis. But, how does this affect the average homeowner and what does it mean to you?

If you’ve turned on the news lately you have probably heard something about how mortgage defaults and foreclosures are on the rise throughout the country. But, if you look over a longer term, say since 1990, do you think the percentage of people in foreclosure has gone up or down over the last 17 years?

The answer is up – pretty dramatically actually. The number of people who are behind on their mortgage payments by 90 days or more has increased by almost 18% since 1990. During that same time period, personal bankruptcy filings rose an astonishing 284% with well over 2 million people filing for bankruptcy this past year.

Over the last 17 years, there appears to be a very clear pattern of more and more people struggling with their bills. Obviously 2007 was one of the worst years on record in terms of foreclosure filings, but it is just a small part of a larger growing trend.

So what does this have to do with anyone looking for a new home loan?

This is important because in 1995, sub prime loans, which are higher interest rate loans made to homeowners with less than perfect credit, made up only about 3% of the total marketplace. Really a pretty insignificant portion.

By 2005, that percentage skyrocketed by over 5 times to 16.3%. In other words, approximately 1 in 6 homeowners currently has a high interest sub prime loan.

So, why do you think happened? Why do you think so many people are having trouble qualifying low interest A paper loans? The research into this revealed some startling results.

Freddie Mac, which is a major government sponsored purchaser of home loans, tracks the individual causes of mortgage delinquency. They report that the cause that saw the single largest increase as a reason for mortgage delinquency was what they call "excessive credit obligations", meaning people had more monthly payments than they could afford.

Here are the exact numbers: From 2001 to 2006, 22.5% more homeowners stated the burden of too much debt led them to get 90 days or more behind on their mortgage payments. This percentage increase far exceeded any other factors including unemployment/loss of income, illness in the family or marital difficulties.

So, clearly a trend is developing here. Homeowners are increasingly putting themselves at risk of getting behind on their mortgage payments or going into foreclosure by overwhelming themselves with debt.

Most people think of their credit cards as a completely separate issue from their home. But, this data shows that it is not. All of your debts are part of your total financial picture.

Do you get a free copy of your credit report annually or do you use any credit monitoring services? It’s actually a pretty good idea to check your credit report regularly just to make sure all of the accounts that appear on your credit report are actually yours.

The New York Times examined how the use of credit cards has taken off dramatically in the United States since 1990. Did you know:
-The average American consumer has a total of 13 open accounts on their credit report of which 9 are likely to be credit cards.
-Over 1/3 carry more than $10,000 of unsecured debt as reported to the credit bureaus.
-Just over 1 in 7 people are nearly maxed out to their credit card limits
-Couple all of this with the fact that the average interest rate across all existing credit card accounts is an incredible 13.46% and you have recipe for disaster.

Most people don’t realize that all of that debt affects your credit score and your ability to qualify for more important things like car loans and mortgages.

There are actually 4 main components that go into calculating a credit score. Do you have any idea what they are?
1) Length of time you have had credit
2) Timeliness of payments
3) Number of accounts with balances
4) Balances relative to their limits.

Did you know that people whose credit balances are over half of the limit have an average credit score almost 30 points lower than the national average? That is a significant drop and will almost certainly affect your interest rate and payments on any new mortgage loans you obtain.

Do you ever get any of those 0% interest credit card offers in the mail? Those credit card companies are so good at teasing you in with those incredible introductory offers, aren’t they?

Did you know that even if you have a fixed rate or some kind of low introductory rate on any one of your credit cards that if you are late on a single payment even one time, most credit card companies have clauses in their contracts that will cause your interest rate to increase to 20% or higher? If you are carrying a balance of $10,000 at 8% on a credit card and that interest rate is increased to 20%, it will take you over $9,475 more and 47 months longer to pay that same balance off.

Now remember, the average American carries 9 credit cards. Can you imagine what would happen if you were late on all 9 cards?

Even if someone has a large amount of debt, what do you think the one thing is that mortgage underwriters will look for to offset that debt load?

The answer is money in the bank. Underwriters love to see that you have a cushion to fall back on in case you got in a bind.

A lot of people ask themselves, "Since I am caught in the cycle of using debt to manage monthly expenses, how can I possibly save for the unexpected or prepare for retirement?" The simple answer: you can’t.

However, you are not alone. For the first time in over 70 years, American consumers’ savings rate is actually negative. The average American spends 1.5% more than they make, a savings figure we have not seen since the Great Depression in 1933.

Why do we do it? Why do we keep spending more than we make? Why do we put our family’s homes at risk by overusing credit cards? Why do we continue to ignore our retirement plans, even though we know we shouldn’t?

Perhaps it’s because as a nation, we’re optimistic. We're optimistic that we will always make more money to cover our debts; optimistic that the value of our houses will continue to go up; optimistic that the economy will improve and create more jobs. Optimism can only take you so far. You need a plan.

Close Your Own Loan.com
We've eliminated the Loan Officer. You keep his commission!